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Some market participants have focused on the impact of an improving economy and rising money-market rates, while overlooking the possibility that defaults will increase, said He Qian, manager of Fortis Haitong Pure Bond Fund at HFT Investment Management Co.

"It’s interesting that investors were paying more attention to credit risks this time last year, when there were not as many credit events," said He, whose $895 million fund has beaten 99 percent of its competitors since 2014, data compiled by Bloomberg show. "Such risks seem to have faded from investors’ memories.”

Seven companies have defaulted on a total of 10 bonds onshore so far in 2017, versus 29 for all of last year, according to data compiled by Bloomberg. The benchmark 10-year yield is near the highest in more than a year after the worst quarterly performance in at least 12 years. A strengthening economy is bolstering expectations that yields and money-market rates will climb as the central bank guides borrowing costs higher.

The fund manager said government debt is looking more attractive after the selloff.

The benchmark 10-year sovereign bond yield rose about 40 basis points this year, more than the 35 basis point increase for 10-year AAA rated corporate bonds. The yield in government debt rose 4 basis points to 3.47 percent on Friday, near this year’s high of 3.49 percent on Feb. 6.

“We think sovereign and quasi-sovereign notes by and large have priced in the market expectation of consumer or producer price gains and rising money rates,” He said. “We see less risks buying into them now as they have declined even more than corporate debt.”

The extra yield investors demand to hold five-year AA rated corporate notes over sovereign debt climbed to 195 basis points in February, lower than the 200 figure of April 2016. At the same time, corporate bonds saw three consecutive months of negative net financing through February, with more debt maturing than was issued, which may lead to cash-flow problems.

The People’s Bank of China has twice raised the cost of open-market funds and medium-term loans this year, while keeping benchmark lending and deposit rates unchanged since October 2015. The Bloomberg Barclays China Aggregate Index tumbled 6.3 percent in the last quarter of 2016, the biggest drop since its inception in 2004.

The fund manager also discussed some investment strategies:

Once the market starts to pay attention to credit risks, it will be very difficult to sell AA or AA+ notes, which could lead to liquidity risks. This means it’s time to swap lower grade debt for top-rated notes.

When a particular bond is in trouble, yields of notes with similar industries, ratings or regions are likely to rise as well, so contagion risk should also be considered.